Get your original paper written from scratch starting at just $10 per page with a plagiarism report and free revisions included!

5.an investor-owned enterprise, is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the companys total assets, nor would it affect the firms basic earning power, which is currently 6%. The CFO believes that this recapitalization would reduce the CCC and increase stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?

The companys earnings per share would increase.

The companys net income would increase.

The companys ROA would increase.

The companys ROE would decline.

The companys cost of equity would decrease.

6. companies Good Heart (GH) and Living With (LW) provide in home caregiving services in the Orlando area, have identical tax rates, total assets, and basic earning power ratios, and their basic earning power exceeds their before-tax cost of debt, R(Rd). However, Company GH has a higher debt ratio and thus more interest expense than Company LW. Which of the following statements is CORRECT?

Company GH has a lower ROE than Company LW.

Company GH has a higher net income than Company LW.

Company GH has a lower ROA than Company LW.

The two companies have the same ROA.

The two companies have the same ROE.

7. The Lake M Inc. (LMHC) is an investor-owned firm. Due to Lake Marys policy of limited housing development, LMHCs EBIT is expected to remain constant over time at $100,000 per year. The corporate tax rate is 30%. LMHC uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%.

What is the value of the firm according to MM with corporate taxes?

$587,500

$710,875

$528,750

$475,875

$646,250

8. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

A projects NPV is found by discounting the cash flows at the IRR.

If a projects NPV is greater than zero, then its IRR must be less than zero.

The lower the CCC used to calculate it, the lower the calculated NPV will be.

The NPV of a relatively low risk project should be found using a relatively high WACC.

If a projects NPV is less than zero, then its IRR must be less than the CCC.

9. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

To find a projects IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the projects costs.

A projects regular IRR is found by compounding the cash inflows at the CCC to find the terminal value (TV), then discounting this TV at the CCC.

To find a projects IRR, we must find a discount rate that is equal to the WACC.

If a projects IRR is greater than the CCC, then its NPV must be negative.

A projects regular IRR is found by discounting the cash inflows at the CCC to find the present value (PV), then compounding this PV to find the IRR.

10. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

If a projects IRR is smaller than the WACC, then its NPV will be positive.

A projects regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV), then discounting the TV at the WACC.

A projects IRR is the discount rate that causes the PV of the inflows to equal the projects cost.

If a projects IRR is positive, then its NPV must also be positive.

A projects regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV), then discounting to find the IRR.

11. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

If a projects payback is positive, then the project should be rejected because it must have a negative NPV.

The longer a projects payback period, the more desirable the project is normally considered to be by this criterion.

One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.

The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

12. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

The projects MIRR is unaffected by changes in the CCC.

The projects NPV increases as the CCC declines.

The projects IRR increases as the CCC declines.

The projects regular payback increases as the CC decline

With Our Essay Writing Service

The aim of our service is to provide you with top-class essay help when you ask us to write my paper; we do not collect or share any of your personal data. We use the email you provide us to send you drafts, final papers, and the occasional promotion and discount code, but that’s it!

Order Now